Government Capital Spending and Financing and its Impact on Private Investment in Kenya: 1964-2006

This paper examines the relationship between public investment and its financing on private investment in Kenya for the period 1964-2006. Using an error correction framework and time series data for the fiscal years 1964-2006, the study shows that investment in agriculture has a significant positive effect on private investment, while domestic debt has a significant negative effect. Political risk, real exchange rate, external debt, and tax though negatively related are insignificant. Investment in infrastructure has an insignificant positive effect. These findings have important policy implications that investment in agriculture crowds-in private investment. To encourage private investment, the government should channel increased resources to the agricultural sector. Domestic debt crowds-out private investment, thus the government should reduce its dependence on domestic borrowing to finance budget deficit.